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Here they go again – this time with the Patent SHIELD Act


Written by Ron Katznelson, Ph.D.
President, Bi-Level Technologies
Posted: August 26, 2012 @ 7:25 am

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Before the ink has dried on the America Invents Act, a new patent bill was recently introduced in Congress.  The bill, dubbed the SHIELD Act (Saving High-Tech Innovators from Egregious Legal Disputes Act) or HR 6245, is sponsored by Congressmen Peter DeFazio, D-Ore., and cosponsored by Representative Jason Chaffetz, R-Utah.  This act appears to be a major assault on patentee (patent holder) rights.

The bill introduces new Section, 35 U.S.C. 285A, which reads in part as follows:

“(a) In General- Notwithstanding section 285, in an action disputing the validity or alleging the infringement of a computer hardware or software patent, upon making a determination that the party alleging the infringement of the patent did not have a reasonable likelihood of succeeding, the court may award the recovery of full costs to the prevailing party, including reasonable attorney’s fees, other than the United States.”

The bill has been promoted as a “balanced” bill, addressing plaintiffs’ and defendants’ issues alike.  However, it is no such thing – it is designed to shut off patentees, and only patentees.

First, note the text of the bill: whereas the preamble in Subsection (a) refers to both types of actions – “action disputing the validity or alleging the infringement – the substantive law section is geared exclusively against the patentee “alleging the infringement.”  The substantive section of the bill provides no mechanism for patent holders to recover against accused infringers who raise frivolous defenses (whether raised as a defense in a case in chief or in a declaratory judgment action).  The “balanced” preamble is just a smoke screen.

Second, if this bill were law, it would effectively transform our civil legal system to a “loser pays” system, but only in patent suits, providing for judgments only against patent holders.  Not only is this bill grossly imbalanced in its effects on patentees and defendants, it would provide recovery by accused infringers of not only attorney’s fees but full costs, reasonable or not – a dramatic deviation from general rule, for egregious and exceptional civil cases, that provides only for the recovery of reasonable attorney fees.

Indeed, the bill’s co-sponsor acknowledges and states “[t]his bill combats the problem of patent trolls by moving to a ‘loser pays’ system for software and hardware patent litigation.”  However, the bill’s sponsors fail to explain what makes the frequency, risk, or social harm of “egregious” patent lawsuits any different than those of other “egregious” civil suits in America so as to single out patent right enforcement for a special treatment under civil law.  In fact, the following graph shows that in the last four decades the number of patent lawsuits filed per year has risen at slower pace than other IP lawsuits or when compared to all Federal civil suits.  Patent lawsuits now constitute a little over 1% of all Federal civil suits – the same fraction as that in the mid 1970’s.

The anticipated effects of a “loser pays” system can easily be predicted based on the British experience.  While the SHIELD Act only begins with recovery of attorney fees and costs, little time would pass before the bill proponents’ will also seek to require that patentees post a bond in the amount sufficient to compensate the accused infringer in the event he prevails..  This would make patent enforcement costs prohibitive, killing small business and startup patentees, as it does in the UK.

While there are indeed a few exceptional cases of egregious patent litigation, as there are in other civil litigation, the existing law already addresses these issues by providing recovery from the losing party. The approach has been the law since the 1952 patent act, that introduced 35 U.S.C. §285.  Accompanied by Rules 11 and 57, of the Federal Rules of Civil Procedure which proscribe egregious conduct in litigation, these existing laws have a long and demonstrated track record at limiting egregious litigation.

The potential for egregious litigation did not arise only recently – as some technology companies allege.  The application of §285 over the years demonstrates that in virtually all cases, courts recognize the principle that misconduct in connection with patent litigation which evidences bad faith tends to render a patent case “exceptional” within the meaning of the statute.  Where the losing party has not acted in bad faith, it has generally been held that the standard of exceptionality is not met.  That is the balanced standard we want, and that is what the existing law provides.

For further detail, the reader is referred to the following American Law Report: Martin M. Heit, “Misconduct related to litigation as rendering patent case ‘exceptional’ for purposes of 35 U.S.C.A. § 285,” 64 A.L.R. Fed. 175 (2012).  Heit’s article is a broad survey of §285 case law, one that demonstrates the rich protections against abuse that now exist under current law in §285.

The proposed SHIELD Act seeks to go well beyond punishing patentees’ egregious conduct and compensate wrongly-accused infringers.  Rather, it seeks to fundamentally tilt the existing balance of risks among litigants in order to erect additional barriers for patent enforcement.  Note the proposed statute’s preamble – “Notwithstanding section 285” – and the provision attaching liability to the patentee who “did not have a reasonable likelihood of succeeding.”  In other words, the bill’s premise is that the protections and remedies under existing law – which for years have protected against fraud, abuse and bad faith – are now considered inadequate!

Now, the bill’s proponents want to subject patentees (and only patentees), who committed no act of bad faith, to liability solely on a basis of a colorful difference of opinion as to their likelihood of success.  The proposed law requires a patentee make a determination ex-ante, of what a court would deem to be, ex-post, unreasonable.  Would the determination of likelihood of success be applicable before or after the Markman hearing?  In contrast with its title, this proposed statute is not keyed on any “egregious” action or abuse; it does not provide notice as to the conduct to which liability attaches; it is designed to simply shift the patent litigation risks onto patentees.  For this reason it should be summarily rejected without any opportunities for amendments.

Another section of the bill contains a definition of “a computer hardware or software patent” that would be subject to the bill’s provisions.  It is worth noting that Representative DeFazio’s bill started making the rounds on the Hill as targeting only “software patents.”  It appears that obtaining Representative Chaffetz’s co-sponsorship may have required broadening the target to include “computer hardware.”

However, any focus on the definition of “a computer hardware or Software Patents” misses the point and deflects attention from the real issue.  That definition is irrelevant, as it fluidly shifts in order to expand the bill’s sponsorship base.  If enacted, a bill of this kind for any patentable subject matter is a slippery slope and a kiss of death to the value of any patent.

Finally, legislative safeguards against egregious harassment actions should be enacted, but only in proceedings for which no such protections are currently available under state tort law or under Federal law – for USPTO administrative proceedings such as ex-parte reexaminations, post grant reviews and interpartes reviews.  Here, federal courts have ruled that a patent owner’s state court suit for damages against a party who unlawfully requests reexamination is preempted by federal laws governing the USPTO.  But the USPTO has acknowledged that it offers no remedy to a patent owner victimized by fraud in reexamination and other post-issuance proceedings. A federal cause of action should be available, but under current law it is not.  It is only for these proceedings that a legislative fix should be provided.  The SHIELD Act, however, should be summarily rejected, as it is a recipe for suppressing patent protection and investments in inventions.


14 comments
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  1. Ron,

    The SHIELD act is bad for all the reasons you state. Like the AIA (which I call the Abominable Inane Act), SHIELD act has a misleading and disingenuous title.

  2. Ron-

    Thanks for the very informative and impartial analysis, that uses actual Facts instead of rhetorical arm-waving, that seems to be so common with some of our Congress members. Why our representatives are so quick to do the bidding of one of the most wildly profitable industries of all time at the expense of the vast majority of inventors in other fields is still very mystifying to me. I suspect it has to do with some of our law makers getting re-elected, with the assistance of generous campaign donations or other considerations to their benefit.

    Do you happen to know the best way to try to block the legislation? Fortunately my Senator Maria Cantwell (D-WA) was one of only 5 Senators that protested and voted against the America Invents Act. Any ideas about when it might be getting to the Senate floor for a vote? Very well said EG, about the use of a misleading and disingenuous title for the bill, that tries to distract folks away from the real consequences of the legislation.

    Stan~

  3. Dr Katznelson, invoking England is not a good idea, despite its Loser Pays rule and despite damages awards being compensatory rather than punitive. Injunctive relief is given as a matter of course, and soon, and this is what corporate Defendants fear. Of all the patent infringement suits initiated each year in England, only a handful fail to settle before going to trial. NPE’s do litigate and do win, in England.

    What this boils down to in England is that NPE’s do invest, but only when they can see a solid prospect of a win. What’s wrong with that?

  4. Max-

    Injunctive relief is pretty much Gone here the US, either temporary or permanent, due to what I think were badly mistaken court decisions in the near past. If an injunction is sought, the usual defense is to get a Declaratory Judgment in the matter, which means the infringer gets to choose the venue for those proceedings, often thousands of miles away.

    You are trying to compare Apples to Limes. Zebras to Elephants. They are not comparable situations, as the possible consequences here in the US could be much worse.

  5. On a brighter note though, both Blind Dogma and Step Back have been conspicuously absent lately, which probably means that they are too busy with clients to be able to engage in witty repartee`

  6. Yes Stan, that is correct.

    I don’t see a let-up until after the AIA spring date passes.

    I think we need Gene to post a “software patent” story in order to have the kool-aid sales coast in…

  7. MaxDrei,
    You argue that in UK patentees invest and file suits, “but only when they can see a solid prospect of a win. What’s wrong with that?” Nothing per se, except that it is only one side of the coin.

    Your conclusion is applicable to any legal dispute. I have seen no cogent argument supported by credible empirical evidence that the economics of patent disputes warrant any different treatment than other disputes under tort law. Therefore, your essential point is that the American system should adopt the British system of “loser pays.” That way, plaintiffs will sue, “but only when they can see a solid prospect of a win.” How solid should the prospect (i.e. perceived probability) be before a potential plaintiff gives up on asserting a meritorious claim? How solid should the defendant’s prospect be before succumbing to an aggressive settlement offer from a plaintiff making a frivolous claim?

    That issue has been debated, studied and beaten down over decades, and Americans still conclude that cost shifting should only occur in suits brought on frivolous, egregious or bad faith grounds. And that is our law.

    The law prods disputants to resolve their differences by private bargaining, and when negotiations fail because of disparity of perceived risks by the parties, the courts dictate a resolution in the final stage of a legal dispute. Thus, only a fraction of disputes are selected for litigation. Empirical studies show that about nine out of ten lawsuits in the U.S. are settled before trial. Objective economic analyses of these issues shows that a switch to the British cost shifting rule will result in a larger fraction of disputes that go to trial because of higher stakes and risks to both parties. See, for example the article “Economic Analysis of Legal Disputes and Their Resolution” by Cooter and Rubinfeld (at http://www.ww.uni-magdeburg.de/bizecon/material/cooter.rubinfeld.1989.pdf.) It explains the basic balance of risks and cooperative surplus tipping points in legal disputes.

    Over the last two centuries, the American legal system resolved an order of magnitude more commercial and tort disputes than any other legal system in the world; it has done so while being generally fair and accessible to litigants, developing the richest and most diverse case law record in history. So you see, Max, for this reason and the reasons explained in the paper cited above, the American system of shifting legal costs only in suits brought in bad faith should command respect.

  8. I will read the Paper Ron, and thanks for sending it, but I have to say that reading its first and last pages did not enthuse me.

    Germany has a Loser Pays Rule but what the loser pays is a flat tariff fee fixed by the court at the outset. Germany has a HUGE amount of patent litigation. it assures the world that its caselaw is the richest and fairest in the world and that its cases are decided quicker than anywhere else in the world. Its patent law (like that of the USA) commands respect. Whether the loser should pay anything, or just the bad faith litigant, is an interesting debate.

  9. Ron, you write above that:

    “….a switch to the British cost shifting rule will result in a larger fraction of disputes that go to trial …”

    You are citing the theory mentioned on page 1078, I suppose. Perhaps you should mention Footnote 19 to the next following paragraph on that page, about practice as opposed to theory. The Footnote concludes that in reality there is a higher rate of settlement “under the British rule than under the American rule”.

    You don’t mention the para that starts the right hand column on page 1078. It asserts that the English rule “strengthens the bargaining position of defendants”. That is a key issue, isn’t it.

    Neither do you mention the bit on page 1088 about the study by Marilyn Simon that revealed that the English rule “reduces the probability of court error”.

    I see that the Cooter and Rubinfeld study is on the premise (p.10719 that all litigation is between strangers and explicitly “outside a market context”. Great for comparing cycle accidents in Munich, London and New York, perhaps, but no use in cases like Apple v. Samsung, Kodak v. Polaroid or J&J v. Medtronic, and no use either, I would say, in patent cases where an NPE is the Plaintiff.

    I particularly charming the premise (page 1087) that a court decision given under conditions of “full information” is “correct”. Again, while this is OK with liability in cycle accidents, it does not fit with any patent cases where claim construction or obviousness is involved.

  10. There have only been 2 cases of rule 11 succeeding – one of those was reversed, the other was a mere reprimand, yet the author writes this utterly false and misleading statement:-

    “Rules 11 and 57, of the Federal Rules of Civil Procedure which proscribe egregious conduct in litigation, these existing laws have a long and demonstrated track record at limiting egregious litigation.”

    (see page 64 of “Sanctions Imposable for Violations of the Federal Rules of Civil Procedure”)

  11. You are wrong. The protections and remedies under existing law – which for years have failed to protect against fraud, abuse and bad faith – are inadequate. They do not protect small software / technology companies from extortion and misuse from patent owners who attempt to exceed the statutory limitations of their rights knowing full well the small company cannot afford to defend itself in court.

  12. Rich-

    No. It is you who are wrong.

    The protections in place are not inadequate, they are just not used.

    There is no reason to add laws when laws exist that could solve a problem if only applied. The addition of a law is just a feel-good moment. Why would you ever believe that a new law would be applied when existing law is not applied? Curious.

    -Gene

  13. Rich-

    Perhaps the small software/ technology companies might want to be a bit smarter about what they attempt to claim is or should be theirs. If they are trying to take too much from others they will most likely fail, so how much does that benefit other inventors? Not at all. It makes them seem to be very greedy, even if they are not. Tthe reverse is actually true in most cases. Starving artists trying to create brand new things out of nothing but their imagination, and very little else.

    Trying to change US patent law to suit some particular sector is nearly impossible short of about 5 years of intense efforts and expensive lobbying activities. The law is just what it is, no matter what anyone happens to think of it. It took the big guns more than 8 years to get *patent reform* done, at a cost of about $500 million, to consider it conservatively. They only got part of what they wanted, so they will probably be back for more in a few years.

    Semper paratis,
    Stan~

  14. Rich,
    You say that existing Federal Rules of Civil Procedure “do not protect small software/technology companies from extortion and misuse” from those who know “full well the small company cannot afford to defend itself in court.” If that is so, do we not have a problem with our Civil Procedure Rules generally? Extortion and misuse through legal threats, knowing full well that a small company cannot afford to defend itself in court is not a problem unique to patents – these are tactics that apply in every dispute if the legal protections are inadequate. What distinguishes patent disputes from others, and do you have any evidence for such a distinction? Why don’t you try to reform our Federal Rules of Civil Procedure? You will do a lot of good to every small entity that “cannot afford to defend itself in court” – not just to those involved in patent disputes.